Credit rating agencies and Shadow banking UPSC pre 2022

This question on Credit rating agencies was a medium-level question because it can be done using the Elimination technique.

Consider the following statements :

1. In India, credit rating agencies are regulated by the Reserve Bank of India.

2. The rating agency popularly known as ICRA is a public limited company.

3. Brickwork Ratings is an Indian credit rating agency.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(d) 1, 2 and 3

Tip

All the credit rating agencies in India are regulated by SEBI.

Solution- “B”

What is a Credit rating Agencies[CRAs]?

A credit rating agency is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. Wikipedia

CRAs were in news due to several reason

1. To address the issue of Shadow Banking SEBI tightened the Norms for CRAs.

What is shadow Banking?

It is a set of activities and institution, which operate partially or fully outside the traditional commercial banking sector.

They are not fully regulated by RBI.

Issues with Shadow banks

Their assets are risky and illiquid and if there is a bank-run-like situation then Shadow bank can not honour their obligation.

The same thing happened during the IL&FS crisis.

2.India has proposed the BRICS group to set up its own independent credit rating agency.

Because World’s top three credit rating agencies- Fitch, Moody’s and Standard & Poor are pro-US and EU so they do not give good ratings to Govt bonds of India, China, and Russia despite the economic growth so they have to give more interest.

ICRA is an independent and professional investment Information and Credit Rating Agency.

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